Court of Appeal (Cal.) Finds No Private Right of Action for Violating California’s CFL Law by Unlicensed Lender

In Lagrisola v. N. Am. Fin. Corp., No. D080758, 2023 WL 7273708, at *1–2 (Cal. Ct. App. Nov. 3, 2023), the Court of Appeal found no private right of action against a mortgage company who was not properly licensed in California.

NAFC is a Nevada based business entity with offices in California. In 2017, the Lagrisolas borrowed $550,000 from NAFC, secured by real property in San Diego. This was one of 319 loans NAFC originated to California consumers between July 1, 2014 and August 27, 2018. NAFC acted as both the loan broker and the lender on the loans, but was licensed in California only as a broker. NAFC was not licensed to lend money to consumers in California, as required by Financial Code section 22100, during the relevant time period.
NAFC did not inform any of its prospective borrowers that it was not licensed as a lender in California. And, according to the FAC, “NAFC’s dual role as both loan broker and lender prevented [the Lagrisolas] from learning about its unlicensed status as lender. Ordinarily, the loan broker would be tasked with ensuring that Plaintiff homeowners only borrowed from lenders with the proper license in the state.” The Deed of Trust securing the loan for the Lagrisolas identified NAFC as the “Loan originator” and included a Nationwide Multistate Licensing System and Registry (NMLS) number for NAFC but did not specify whether NAFC was licensed as a finance lender. The Lagrisolas were unaware that NAFC was not licensed as a finance lender and would “never have signed up to a loan with NAFC had they been informed that the company was not legally permitted to make loans to them or to any other California borrower.” They “would have gone elsewhere to obtain their loans had they been informed that NAFC” did not hold a lending license. NAFC resold the loans it issued, including the Lagrisolas’, into a secondary marketplace and received compensation from the resale of each loan. In December 2020, California regulators entered into a settlement agreement with NAFC to address its unlicensed lending activity. Pursuant to the settlement agreement, included as exhibit B to the original complaint, NAFC was ordered to “refrain from violating Financial Code section 22100, subdivision (a), by engaging in the business of a finance lender without obtaining a license” and to pay an administrative penalty of $75,000. The parties acknowledged the settlement agreement was “intended to constitute a full, final, and complete resolution of the violations.” The settlement was the “first public revelation of NAFC’s unlicensed lending activity,” and the impetus for the current litigation.
The Lagrisolas assert three causes of action in the FAC.

The Court of Appeal found no private right of action for violating the CFL Law.

In the third cause of action in the FAC, the Lagrisolas assert violations of Finance Code sections 22100 and 22751, based on the allegation that “NAFC lacked a license to lend money to California borrowers.” They assert that the “law specifically commands that an unlicensed lender is to forfeit all interest and finance charges made on any unlicensed loan.”  Financial Code section 22100, subdivision (a) provides, “[n]o person shall engage in the business of a finance lender or broker without obtaining a license from the commissioner.” Section 22751, subdivision (a) provides, “[i]f any amount other than or in excess of the charges permitted by this division is charged or contracted for, or received, for any reason other than a willful act of the licensee, the licensee shall forfeit all interest and charges on the loan and may collect or receive only the principal amount of the loan.” And related section 22752, subdivision (a) likewise provides that the licensee shall forfeit all interest and charges on the loan “[i]f any provision of this division is violated in the making or collection of a loan.”  Here, the Lagrisolas acknowledge that NAFC sold the loans and is no longer collecting interest or charges, but assert that NAFC made a profit on the sale of the loans, in part because the third party buyers were able to charge interest on them. Accordingly, the Lagrisolas pray that the trial court order NAFC “to pay to Plaintiffs’ [sic] any amounts received from either borrowers or any third party on account of the inclusion of interest or finance charges on the amounts loaned to Plaintiffs in each of the unlicensed loans made to them by NAFC.”  The trial court sustained NAFC’s demurrer as to this cause of action as well, ruling that the statutory scheme does not contemplate a private right of action to pursue violations of the Financial Code. As noted above, we review the trial court’s ruling on this issue de novo. (See Morris, supra, 78 Cal.App.5th at p. 292, 293 Cal.Rptr.3d 417; Blank, supra, 39 Cal.3d at p. 318, 216 Cal.Rptr. 718, 703 P.2d 58.) Like the trial court, we conclude that neither Financial Code section 22100 nor Financial Code section 22751 provide a private right of action.  A violation of a state statute does not automatically give rise to a right of recovery by a private individual. Courts will allow a private right of action only where a statute allows one. (Mayron v. Google LLC (2020) 54 Cal.App.5th 566, 571, 269 Cal.Rptr.3d 86.) The statute must contain “ ‘ “ ‘clear, understandable, unmistakable terms,’ ” which strongly and directly’ indicate a private right of action is allowed.” (Ibid., citing Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592, 596–597, 113 Cal.Rptr.3d 498, 236 P.3d 346.) If the statue “does not contain an unmistakable directive,” the court may consider the legislative history of the statute to determine whether the Legislature intended to create a private right of action. (Mayron, supra, at p. 571, 269 Cal.Rptr.3d 86.)  As relevant here, Financial Code section 22713 specifically provides that the commissioner may bring an action or request that the Attorney General bring an action in the name of the people of the State of California. (Fin. Code § 22713, subd. (a).) The violator may then be liable for civil penalties, as NAFC was here. (Fin. Code § 22713, subd. (b).) Moreover, “[i]f the commissioner determines that it is in the public interest,” the commissioner may include “a claim for restitution, disgorgement, or damages.” (Fin. Code § 22713, subds. (b) & (c).) Here, it is undisputed that the commissioner resolved such an action against NAFC through a settlement in December 2020. Despite the final resolution of that matter, the Lagrisolas now seek to pursue damages for NAFC’s alleged Financial Code violations in addition to those recovered by the commissioner. But, when regulatory statutes, like the Financial Code, “ ‘ “provide a comprehensive scheme for enforcement by an administrative agency, the courts ordinarily conclude that the Legislature intended the administrative remedy to be exclusive unless the statutory language or legislative history clearly indicates an intent to create a private right of action.” ’ ” (See Noe v. Superior Court (2015) 237 Cal.App.4th 316, 337, 187 Cal.Rptr.3d 836.)  The Lagrisolas point to Financial Code section 22752, subdivision (a), which provides that “the licensee shall forfeit all interest and charges on the loan” if the licensee violates a provision of the Financial Code. However, this language does not clearly indicate a private right of action, particularly when read in context with Financial Code section 22713. It merely provides that the licensee may not collect interest on the loan. This is far different from the type of statutory language held to support a private right of action. (See Lu, supra, 50 Cal.4th at p. 597, 113 Cal.Rptr.3d 498, 236 P.3d 346 [listing examples of clear directives, including language “expressly stat[ing] that a person has or is liable for a cause of action for a particular violation”].)  The Lagrisolas rely on Goehring v. Chapman University (2004) 121 Cal.App.4th 353, 17 Cal.Rptr.3d 39. There, the court found that the language of Business and Professions Code section 6061 conferred a private right of action on students who alleged that Chapman had not provided the disclosures required by the statute. As relevant here, the statute provides, “[i]f any school does not comply with these [disclosure] requirements, it shall make a full refund of all fees paid by students.” (Bus. & Prof. Code § 6061, italics added.) The Goehring court concluded that the statutory requirement of a refund to students meant that the students had the right to pursue an action for the refund due to them. (Goehring, supra, 121 Cal.App.4th at p. 377, 17 Cal.Rptr.3d 39 [distinguishing cases in which the relevant statute “did not expressly entitle individuals to a refund or any other type of payment for violation of the statute”].) Here, Financial Code section 22752, subdivision (a) provides for a forfeiture of fees and interest, not a refund. Unlike Goehring, in which the statute expressly identified both the party in violation, against whom the claim could be asserted (there, the University) and the party to whom payment should be made (there, the private-party student claimants, through a refund to them), the Financial Code does not identify a private party to whom the forfeited amounts would be repaid. Rather, it simply states that the lender can only collect on the principal and must forfeit any interest. And, as we have already noted, section 22713 specifically provides for enforcement through action by the commissioner. Finally, the courts can also look to a statute’s legislative history to ascertain whether the Legislature intended to convey a private right of action. But, here, the Lagrisolas have not identified any legislative history, or other legal authority, to support a conclusion that the Legislature intended that violations of the Financial Code could be pursued by a private right of action. (See Singman v. IMDB.com, Inc. (2021) 72 Cal.App.5th 1150, 1151, 287 Cal.Rptr.3d 717 [appellant bears the burden of establishing legal error through citations to the record and relevant legal authority].) Accordingly, we agree with the trial court’s reasoning that the provisions of the Financial Code “do not provide ‘clear, understandable, unmistakable terms’ for a private cause of action,” but instead provide for enforcement of violations “via an action by the [c]ommissioner” which “is what occurred in this case.”